The contribution margin is the amount remaining from sales revenue after variable expenses have been deducted (Garrison et al., 2017). While the definition is simple, it may not be straightforward to calculate, especially if we only have limited secondary data. In this article, I will provide one illustration of how to calculate the contribution margin for Tesla.

Tesla manufactures various models of electric vehicles, so to determine Tesla’s contribution margin, we have to include its multi-product nature. In this article, I will limit my example to only one model and use the financial and sales data available from the company’s website, as well as hypothetical data to complete the calculation.

* Also read about Manufacturing Costs for Tesla*

To obtain the contribution margin, we should identify the cost behavior pattern, which is how the total cost will change in regard to changes in activity (Whitecotton et al., 2019). To do this, we must first determine how much of the cost is variable and how much of it is fixed. We should also consider the relevant range and time window where those identified costs will remain accurate. Along with these variables, the price and the number of unit sales for each model must also be prepared for the calculation.

Tesla released its financial updates every quarter, so we can use historical data to create cost estimations and determine the contribution margin. To illustrate the calculation, assume the data as follow.

Quarter | Unit Sold | Total Costs (in millions of USD) |

2020-Q3 | 124,318 | 4,966 |

2020-Q4 | 161,701 | 6,292 |

2021-Q1 | 182,847 | 7,003 |

2021-Q2 | 199,409 | 7,531 |

There are four common methods to estimate fixed and variable costs: account analysis, high-low method, scattergraph method, and regression; which all use linear assumption (Heisinger & Hoyle, n.d.). For this example, we can use simple linear regression analysis using Excel. The Excel graph is shown below.

*Regression analysis. The y intercept is 723.57 and the x variable coefficient is 0.343, which means that if x equal 0 (no units produced), Tesla will still have 723.57 in total costs. And 1 unit will add 0.343 million in total cost*

Based on the regression analysis, we can obtain the result of a y-intercept of 725, which translate to 725 million USD in fixed cost. We also get an x-variable coefficient of 0.034 which is the variable cost per unit of 0.034 million or $34,000. Thus, we can obtain the total cost function in millions of USD: f(x) = 725+0.034x with x as the number of units sold.

Assume that the company forecasted the third quarter sales will be 210,000 units, with the price of the model being $45,000 per unit. Based on this information, we can calculate the contribution margin, unit contribution margin, and contribution margin percentage using the table below.

Total (in millions of USD) | Calculation | Per Unit (in millions of USD) | Percentage | |

Sales Revenue | 9,450 | = 45,000 *210,000 = 9450 mil | 0.045 | 100% |

Variable Costs | 7,140 | = 210,000*0,034 = 7140 | 0.034 | 76% |

Contribution Margin | 2,310 | = sales revenue – variable cost | 0.011 | 24% |

Fixed Costs | 725 | |||

Net Operating Income | 1,585 | = contribution margin – fixed cost |

The contribution margin is the amount remaining from sales revenue after variable expenses have been deducted (Garrison et al., 2017). In this case, the contribution margin is 2.31 billion USD. It will cover the fixed cost before going to the operating income. The result depicts the cost structure estimation that can be used for managerial decision-making.

* Also read about Selling, General, and Administrative Expenses for Tesla*

ReferencesGarrison, R., Noreen, E., & Brewer, P. (2017).Managerial Accounting(16th ed.). McGraw-Hill Education. Heisinger, K., & Hoyle, J. B. (n.d.).Accounting for Managers. https://2012books.lardbucket.org/books/accounting-for-managers/index.html Whitecotton, S., Libby, R., & Phillips, F. (2019).Managerial Accounting(4th ed.). McGraw-Hill Education.

*Read more about Managerial Accounting*